August 5, 2019 BARRON’S M9
Commodities Corner
Iron-Ore Boom May Go Bust
By Simon Constable
THE RECENT IRON-ORE BOOM MAY BE ENDING. PRODUCTION OF THE MINERAL, WHICH
isusedtomakesteel,isreboundingafterrecentdisaster-relatedinterruptions
tominingoperations.Thatsupplysurge,alongwithslippingdemand,should
send prices into a tailspin, analysts say.
“Weareapproachingpeaksupplydisruptionsinironore,”Barclayswrotein
areport.“Wearestartingtoseeaclearsupplyresponse.”Inotherwords,there
maynotbemoresupplyoutagestokeeppriceshigh,andsupplieswillprobably
increase in the coming months. Lower demand should also weigh on prices.
Barclays sees prices dipping to an average of $70 a metric ton next year,
downfromarecent$120.Morningstaranalystsseetheplungetakingtheprice
down even further, to $41 by 2023.
Toprofitfromthelikelymove,investorsshouldconsiderbuyingputoptions
thatgaininvaluewhenpricesforFebruary-datedCMEiron-orefuturescon-
tractsfallbelow$90.Alternatively,investorsmightwanttoreduceholdingsof
the four largest miners: BHP (ticker: BHP), Fortescue Metals Group
(FMG.Australia), Vale (VALE), and Rio Tinto (RIO.London).
Priceshavejumpedroughlythreefoldoverthepastthreeyears,withmuch
oftherallycomingastheresultofsignificantandunexpectedproductionout-
ages.Ironorefetches$118ametrictonversusabout$40atthebeginningof
2016, according to TradingEconomics. That’s the highest level since 2014.
TwonotablesupplyinterruptionsoccurredinAustraliaandBrazil,thetop
two producers of the mineral.
InJanuary,anaccidentataBrazilmineownedbyVale,theworld’sbiggest
iron-oreproducer,killedhundredsofpeopleandtemporarilyshutoperations.
CyclonesinAustraliainMarchinterruptedminingoperationsandactivityat
the freight ports from which iron ore gets shipped.
“We estimate that more than 100 million metric
tonsofiron-oreproduction,or6%ofthe1.8billionton
market,hasbeenlostin2019,”accordingtoaMorn-
ingstarreport.Putsimply,theseweren’tminorsupplyshocks,andtheylargely
account for the price rally in the metal.
However,highpriceswillprobablyleadtoincreasesinsupplyandreverse
the rally. Morningstar sees Vale alone ramping up production to 400 million
metrictonsoverthenexttwotothreeyears,up25%versusthisyear.Itwon’t
betheonlyone.“Allofthebigfouriron-orefirmswillfindawaytoincrease
supply,” says Matthew Miller, a mining analyst at financial research firm
CFRA.“Wedon’tthinkthemarketisgoingtobeastightin12to16months.”
Demandlookssettofall,especiallyfromChina,whichproducesabouthalf
ofallsteelintheworld.Chinesesteelinventoriesarerising,which“suggests
thatdemandmaybestartingtorollover,”accordingtoaUBSreport.When
demandforsteelslumps,ironoreprobablywillseeweakerdemand.Thattends
to send prices lower.
Investors looking for put options on iron-ore futures contracts should be
careful because they can be highly risky. The market price for the mineral
mighttakelongertofallthanexpected,meaningthattheoptionsexpireworth-
less before they are profitable.
Thereareotherpotentialrisks.Miningisaninherentlyunstablebusiness,
andmoreinterruptionstosupplycouldhappenthroughbadweather,accidents,
or industrial action by organized labor.
Overall,therisksofbettingonadeclineiniron-orepriceslooksworthit.
Commodity Indexes,
Barrons.com
Market View
A Sampling of Advisory Opinion
Dissent at the Fed
The Weekly Speculator
byMarketfield Asset Management
Aug. 1: This has been a week domi-
nated by the Federal Reserve, with
Wednesday’smeetingleadingtoreposi-
tioning by traders at the start of the
week,andthenaviolent[Wednesday]af-
ternoon saw much of this upended by a
very messy [Fed] news conference.
Therearetworeasonsforthis.Although
theFederalOpenMarketCommitteede-
livered its 25-basis-point “cut without a
cause,” there had been a view held
withinthemarketthata50-bpcutwould
be delivered. It does not really matter
how strongly participants believed that
such a cut was required, since its ab-
sence required an immediate readjust-
mentbymacroportfoliosthatcutacross
multiple markets.
Moreseriouswasthesensethat[Fed]
Chairman Jerome Powell is starting to
lose control of his audience both within
the FOMC and outside the institution.
Wednesday’s rate cut saw two voting
members dissent, following last month’s
single dissent against standing pat and
several nonvoting members making
pointedcommentsinitsaftermath.Powell
thusleadsamorediversegroupofopin-
ionthananyotherchairmaninrecenthis-
tory, and a collection of personalities
that’s not afraid to be both “seen and
heard.” To the extent that his public ap-
pearancescoincidewithunpleasantmar-
ket action, his internal standing is likely
to be eroded.
--Michael Shaoul and Timothy
Brackett
Bet on Bonds
The National Investor
by National Investor Publishing
Aug. 1: The handwriting is on the
wall...despite what brave (if at times
veryconfused)facePowelltriestokeep.
It’s a matter of time before U.S. yields
continue more earnestly to move lower;
alternately,[before]headlines/globaleco-
nomic issues pull the Fed toward more
cutsand/ormarketsstarttoworryeven
morethattheFedistooslow,andagain
[bring]onarecession.Soourlong-Trea-
sury exchange-traded funds—iShares
20+ Year Treasury Bond (TLT) and
Direxion Daily 20+ Year Treasury Bull
3XShares(TMF)—arebacktoaBuy.If
you’ve not done so previously, top up
your allocations.
--Chris Temple
Boeing Woes Ding GDP
Cumberland Advisors Market Commentary
by Cumberland Advisors
July 30: This quarter’s gross-domes-
tic-product number contained a couple
of interesting twists. Only two catego-
ries accounted for positive growth—con-
sumer spending and government spend-
ing. The consumer number is especially
interesting since it accounted for 2.9
percentage points of growth, while gov-
ernment spending added 0.9 percentage
points....Finally, there is a wild card in
trying to figure out how much of an im-
pact the problems with the Boeing MAX
737 may have on both domestic produc-
tion and international trade. We know
that the Saudis have cancelled a 50-
plane order, and there have been re-
lated cuts in parts and components, as
well. Mike Englund of Action Economics
estimates that Boeing’s impact took
about 0.2 percentage point off GDP
growth in the second quarter, and with-
out the MAX problem, export growth
would have been -3.2 instead of -5.2%,
and equipment growth would have been
2.7% instead of only 0.7%.
--Robert Eisenbeis
Tobeconsideredforthissection,material,
withtheauthor’snameandaddress,should
[email protected].
”Powell...leads a more diverse group of opinion than any other
[Federal Reserve] chairman in recent history, and a collection of
personalities that’s not afraid to be both ’seen and heard.’ ”